Gold, oil set to power 2021 boom in raw materials

Conditions are ripe for commodity prices to zoom higher in 2021, according to Wall Street analysts.

A global economy that’s in recovery mode from a COVID-19-induced slowdown, a weakening U.S. dollar, unprecedented monetary stimulus and supply constraints is providing a favorable backdrop for everything from oil to copper to gold.

Signals are appearing that suggest the start of a “sustainable positive feedback loop between commodities, the dollar and emerging-market growth that has driven past structural bull markets,” wrote a Goldman Sachs research team led by economist Jeffrey Currie.

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Higher commodity prices add more value to global trade and larger emerging market trade surpluses, they said. Those trade surpluses create credit availability that results in stronger demand and higher prices while at the same time putting pressure on the dollar and supporting prices.

Commodities have suffered through a “super bear cycle” for much of the past decade, said John LaForge, head of real asset strategy at Wells Fargo.

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However, West Texas Intermediate crude oil crashing to a record low -$36.73 per barrel in April produced the kind of “watershed event” needed to get investors interested in commodities again, he said.

Currie’s team at Goldman Sachs forecasts WTI crude oil will reach $55.90 per barrel next year, up 16% from the $48 where the energy component settled on Tuesday.

LaForge predicts WTI could climb as high as $55 as travel via cars, airplanes and cruise ships will “gradually improve” next year while damage to U.S. oil wells will make it “difficult” to bring back supply.

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Gold prices, meanwhile, are expected to benefit from rising inflation expectations and a drop in the U.S. dollar in response to the large amounts of monetary and fiscal stimulus used to combat the economic slowdown caused by COVID-19.

Currie sees the precious metal surging 22% to $2,300 an ounce. Analysts at Citigroup were a bit more cautious, forecasting a price of about $2,100. Bank of America sees gold’s upside “limited moving into 2021” with the price ending the year at $2,063.

Tight supplies and growing global demand despite efforts by China to rein in stimulus will lift copper next year, according to a Bank of America research team led by commodity strategist Michael Widmer. They say the red metal could reach $8,000 a ton on the London Metals Exchange, up from $7,814 currently. Others say infrastructure spending from a Biden administration could boost prices.

David Rosenberg, chief economist and strategist at Toronto-based Rosenberg Research, thinks there are “good arguments to be bullish” on commodities, but also says there are “reasons for caution.”

Rosenberg warns of the potential for a “reversal in risk appetite” that results in a countertrend rally in the U.S. dollar and also believes renewed coronavirus lockdowns could curtail economic activity and demand for commodities.

“The vaccines are clearly a very bright light at the end of the tunnel, but we continue to feel the path forward will be uneven and bumpy,” he said.